Monday, March 28, 2011

If you export U.S. manufactured goods, have you considered the benefits of utilizing an IC-DISC?

The IC-DISC may be the only remaining US export incentive.

U.S. taxpayers that export have had their U.S. tax benefits curtailed over the last few years. For better (or worse?), disco music may never make a successful comeback. However, a U.S. tax break given to exporters by Congress in the early 70s is having a resurgence. The 15% tax rate on corporate dividends makes the IC-DISC worth looking into - even if the structure didn't make sense before.

A U.S.-based exporter is allowed a deduction for the commission paid to the IC-DISC at the exporter’s ordinary tax rate, and the shareholders of an IC-DISC are taxed on the resulting dividend at the 15 percent rate. Assuming a maximum 35 percent corporate tax rate, the tax savings can reach approximately 20 percentage points.

What is an IC-DISC?

The IC-DISC, in most cases, is no more than a paper entity, a U.S. corporation that is paid a commission by the related supplier (i.e., the exporter) on its export sales. The IC-DISC is not required to have any employees or perform any specific functions. The commission paid to an IC-DISC is generally the greater of:
-50 percent of the net profits, or
-4 percent of the gross receipts (but not more than 100 percent of the net profits)

On exports of products that are manufactured, grown or extracted in the United States.

The products must be manufactured, grown or extracted in the United States by an entity other than an IC-DISC, and they must be held primarily for sale, lease or rental for direct use, consumption or disposition outside the United States. Distributors and manufacturers /grower may claim an IC-DISC benefit on the same export product. Up to 50% of the fair market value of the export property can be attributable to foreign content.

An IC-DISC must also meet the following requirements:
-It must be a domestic corporation.
-At all times, it must have at least $2,500 in capital.
-It must have only a single class of stock.
-It must file timely elections.
-It must meet a 95% qualified export asset test and a 95% qualified gross receipts test.

An IC-DISC is not subject to U.S. income tax. It is more like a partnership, LLC or S corporation in that its shareholders are subject to U.S. income tax on their share of the IC-DISC’s income. The exporter, its shareholders, its management, its employees, family members or any combination thereof can own the IC-DISC. The IC-DISC can be used to generate incentive bonuses for management or employees, or facilitate succession planning, for example. Alternatively, the funds accumulated in the IC-DISC can be distributed to the shareholders and loaned or contributed back to the exporter if the cash is needed.

The IC-DISC regime provides U.S.-based exporters an opportunity to decrease their U.S. taxes on export profits by up to 20 percentage points.

The IC-DISC - the one remaining U.S. export incentive. It's worth considering, or reconsidering as the case may be.
Max A. Koss, CPA
Frost, PLLC
(919) 782-8410 x1305

No comments:

Post a Comment